Islamabad, 18 March, 2024 (GNP); The International Monetary Fund (IMF) has advised the Federal Board of Revenue (FBR) to broaden the scope of the Capital Gains Tax (CGT) by including cryptocurrencies.
This recommendation was made during discussions between the IMF and Pakistani authorities regarding the $3 billion stand-by arrangement (SBA).
The review, which began on Thursday and spans four days, aims to secure the release of the final tranche of approximately $1.1 billion from the rescue package obtained by Islamabad last summer, thereby preventing a sovereign debt default.
Additionally, the IMF proposed revising tax slabs for real estate and listed securities to ensure taxation of all gains, regardless of asset holding duration.
Furthermore, the IMF urged the FBR to require property developers to monitor and report all transfers preceding property title completion and registration.
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If property developers don’t adhere to the rules, they could face penalties. The IMF has suggested that tax authorities include the widespread practice of trading files for various plots in housing schemes in their tax regulations.
These suggestions could be included in the forthcoming bailout package and the FBR may be obligated to incorporate them into the next fiscal year’s budget through the finance bill.
The IMF technical assistance report highlights that Pakistani authorities have faced difficulties in evaluating and gathering taxes on capital gains derived from the sale of real estate interests.
Typically, interests in real estate are not officially registered until the property’s legal completion. Consequently, the transfer of real estate interests from the initial buyer to subsequent parties, or any transfers before the property’s legal completion, are not currently documented in any recording system.
As a result, profits earned by a seller from such transfers of interest in unfinished properties usually go untaxed.
To address this issue, one proposal involves requiring property developers to monitor and report all transfers of interest in real estate before property titles are completed and registered, with penalties for non-compliance. Additionally, there could be secondary liability for any unpaid taxes, meaning the property developer would be responsible for the tax if the transferor fails to pay it.
The IMF has suggested steps to enhance the taxation of capital gains, including expanding the range of assets subject to capital gains tax to include emerging investment types like cryptocurrencies.
Furthermore, the IMF recommended that capital gains on real estate and listed securities should be taxed irrespective of how long they have been owned.
The IMF has recommended amending the definition of “personal moveable property” in Section 37(1) of the Income Tax Ordinance to encompass a broader category, including any property held for investment purposes, excluding assets that depreciate or amortize.
Additionally, the IMF called for a review of the tax rates applied to real estate and listed securities to ensure that all gains from such assets are taxed at a suitable rate for capital income, regardless of the duration of ownership. They proposed eliminating the provision that exempts capital gains from taxation after a certain holding period.